The
SEC on Wednesday approved two sets of proposed rules to implement
amendments to the Investment Advisers Act of 1940 that were included
in the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The
first set of rules requires advisers to hedge funds and other
private funds to register with the SEC, establishes new exemptions
from SEC registration and reporting requirements for certain
advisers, and reallocates regulatory responsibility for advisers
between the SEC and states. The other rule defines “family offices”
that are to be excluded from the Investment Advisers Act.

In
the first set of rules, the SEC also amended rules to expand
disclosure by investment advisers, particularly about the private
funds they manage, and revised the commission’s pay-to-play rule.

To
enhance its ability to oversee investment advisers of private funds,
such as hedge funds and private equity funds, and
fulfill its responsibilities under Dodd-Frank, which
was passed in July 2010, the
SEC said in a press release that it is requiring advisers to provide
additional information about the private funds they manage. The
amended adviser registration form will require advisers of private
funds to provide:

Basic
organizational and operational information about each fund they
manage, such as the type of private fund that it is (for example,
hedge fund, private equity fund or liquidity fund), general
information about the size and ownership of the fund, general fund
data, and the adviser’s services to the fund.

Identification
of five categories of “gatekeepers” that perform critical roles
for advisers and the private funds they manage (that is, auditors,
prime brokers, custodians, administrators and marketers).

The
SEC also adopted amendments that require all registered advisers to
provide more information about their advisory business, including
information about:

The
types of clients they advise, their employees, and their advisory
activities.

Their
business practices that may present significant conflicts of
interest (such as the use of affiliated brokers, soft dollar
arrangements and compensation for client referrals).

The
rules also require advisers to provide additional information about
their nonadvisory activities and their financial industry
affiliations.

Reporting
Requirements for Exempt Advisers

Under
Dodd-Frank, private fund advisers may not need to register with the
SEC if they are able to rely on one of three new exemptions,
including for:

Advisers
solely to venture capital funds.

Advisers
solely to private funds with less than $150 million in assets
under management (AUM) in the U.S.

Certain
foreign advisers without a place of business in the U.S.

But
the SEC can still impose certain reporting requirements upon
advisers relying upon either of the first two of these exemptions
(“exempt reporting advisers”). Rather than completing all of the
items on the form, exempt reporting advisers will fill out a limited
subset of items, including:

Basic
identifying information for the adviser and the identity of its
owners and affiliates.

Information
about the private funds the adviser manages and about other
business activities that the adviser and its affiliates are
engaged in that present conflicts of interest that may suggest
significant risk to clients.

The
disciplinary history (if any) of the adviser and its employees
that may reflect on the integrity of the firm. Exempt reporting
advisers will file reports on the commission’s investment adviser
electronic filing system (IARD), and these reports will be
publicly available on the commission’s website. These advisers
will be required to file their first reports in the first quarter
of 2012.

Mid-Sized Advisers

Dodd-Frank
raised the threshold for SEC registration to $100 million in AUM by
creating a new category of advisers called “mid-sized advisers.” A
mid-sized adviser, which generally may not register with the
commission and will be subject to state registration, is defined as
an adviser that:

Manages
between $25 million to $100 million for its clients.

Is
required to be registered in the state where it maintains its
principal office and place of business.

Would
be subject to examination by that state, if required to register.

Note
however, that advisers with their principal office and place of
business in Minnesota, New York and Wyoming with between $25 million
and $100 million in AUM won’t have to switch to state regulation and
instead must register with the SEC. New York did not provide
confirmation that it conducts exams of advisory firms when surveyed
by the SEC; Minnesota reported it doesn’t conduct exams; and Wyoming
doesn’t have an investment adviser law.

The
SEC said in its press release that this amendment to the Investment
Advisers Act will force about 3,200 of the current 11,500 registered
advisers to switch from registration with the SEC to registration
with the states. These advisers will continue to be subject to the
Investment Advisers Act’s general antifraud provisions. The SEC said
its amendments:

Reflect
the higher threshold required for SEC registration.

Provide
a buffer to prevent advisers from having to frequently switch
between SEC and state registration.

Clarify
when an adviser will be a mid-sized adviser.

Facilitate
the transition of advisers between federal and state registration
in accordance with the new requirements. Advisers registered with
the SEC will have to declare that they are permitted to remain
registered in a filing in the first quarter of 2012, and those no
longer eligible for SEC registration will have until June 28,
2012, to complete the switch to state registration.

Pay-to-Play

The
SEC also amended the investment adviser “pay-to-play” rule in
response to changes in Dodd-Frank. The pay-to-play rule is designed
to prevent an adviser from seeking to influence government
officials’ awards of advisory contracts through political
contributions.

The
amendment allows an adviser to pay a registered municipal adviser to
act as a placement agent to solicit government entities on its
behalf, if the municipal adviser is subject to a pay-to-play rule
adopted by the Municipal Securities Rulemaking Board (MSRB) that is
at least as stringent as the investment adviser pay-to-play rule.
Advisers will also continue to be permitted to hire as a placement
agent an SEC-registered investment adviser or a broker-dealer that
is subject to a pay-to-play rule adopted by the Financial Industry
Regulatory Authority (FINRA) that is at least as stringent as the
investment adviser pay-to-play rule.

New Exemptions

The
SEC also established definitions for several categories of
exemptions created by Dodd-Frank. Those include:

Dodd-Frank
amended the Investment Advisers Act to exempt from registration
advisers that only manage venture capital funds, and directed
the SEC to define the term “venture capital fund.” The
commission is adopting a definition of “venture capital fund”
that is designed to implement Congress’ intent in enacting this
exemption.

The
commission adopted a rule to implement the new statutory
exemption for private fund advisers with less than $150 million
in AUM in the United States.

The
commission adopted rules to define certain terms included in the
statutory definition of “foreign private adviser” to clarify the
application of the foreign private adviser exemption and reduce
the potential burdens for advisers that seek to rely on it.
Under Dodd-Frank, foreign private advisers are those that (1) do
not have a place of business in the U.S., (2) have less
than $25 million in aggregate AUM from U.S. clients and private
fund investors and (3) fewer than 15 U.S. clients and private
fund investors.

Family
Offices Rule

Historically,
family offices were not required to register with the SEC under the
Investment Advisers Act because of an exemption provided to
investment advisers with fewer than 15 clients. Dodd-Frank removed
that exemption so the SEC could regulate hedge funds and other
private equity fund advisers. Dodd-Frank also included a new
provision requiring the SEC to define family offices in order to
exempt them from regulation under the Investment Advisers Act.

The
SEC’s new rule enables those managing their own family’s financial
portfolios to determine whether their “family offices” can continue
to be excluded from the Investment Advisers Act. The rule excludes
from the registration requirement any company that:

Provides
investment advice only to “family clients,” as defined by the
rule.

Is
wholly owned by family clients and is exclusively controlled by
family members and/or family entities, as defined by the
rule.

Does
not hold itself out to the public as an investment adviser.

The
final rule expanded the definition to include “family clients” in
lieu of the more narrow “family members” in the proposed
rule. The AICPA argued in favor of
this change in comments it submitted on the proposed rule in
November. The Institute said the
definition of a family office’s “family clients” must be inclusive
enough to encompass all of the clients and arrangements that are
typically present in a single-family office. (For prior JofA coverage, see “AICPA Comments on
SEC Proposed Rule for Family Offices.”)

The
rule also defines family members and key employees that a family can
advise under the exclusion.

TAX NEWS

President Barack Obama signed legislation that retroactively extended more than 50 expired tax provisions for 2014, allowing taxpayers to take advantage of a host of tax incentives during this filing season.

A weekly snapshot of global accounting with news from the Journal of Accountancy and other leading accounting publications. It includes summaries of what matters to you, written by expert editors to save you time and keep you informed and prepared.